The Five Stages of Business Growth
How to gain clarity, eliminate wasted time and money, and move forward with a structured plan in your business.
What you’ll Discover
As you continue or begin your entrepreneurial journey, you are increasingly overwhelmed with activity and distractions. And, if you’re like most business owners, you sometimes struggle with what activity needs your attention most, versus what activities are distractions.
If this is your first business, you’re also likely wondering exactly what resources you should reach for: who to recruit, how to get funding, and how to effectively use your scarce time. Let’s explore a framework that answers these questions.
Today, you will learn:
· the Business Growth Pyramid, and it’s five development phases: (1) Dream Up, (2) Startup, (3) Ramp Up, (4) Systems In/Spread Out, and (5) Leadership.
· how do identify which phase your business is in, and should be in;
· activities to focus on in each phase, and the resources to make them happen;
· what professional help is and isn’t needed; and
· how to accelerate your business’ growth through each phase with the Premise-Test-Iterate cycle.
By identifying your business’s stage, and applying the principles appropriate to it, you’ll look and take action like a seasoned entrepreneur, right ‘out of the box.’ But, before we go further, using the stages identified in the list, quickly jot down the phase of business you think you’re in right now.
A Brief History and Theory
(if you find this kind of stuff boring, skip below to "The Stages"):
When I started my first businesses, I struggled with what seemed like an endless onslaught of unknowns -- the frustration of being caught off-guard by the problems I didn’t expect and the challenges I wasn’t prepared for sent me in an long-cycle of distraction. I just did not know what was important, and what could be put off; and, of course, as a new business owner everything business-related seems important.
So, over the last ten years, I’ve been working on a system to help guide my clients -- and myself -- through each entrepreneurial journey.
About six months ago, I stumbled upon a blog by Todd Hermann, a high-achievement coach who counts among his students Jack Dorsey (CEO of Twitter and Square), and yours truly (I can’t recommend his 90-Day Year productivity system highly enough). Todd identifies five stages of business growth -- and I’ll borrow some his framework here; however, while Todd focuses on the personal struggles in business phases, I’m taking a more purely business focus.
Additionally, via Udacity, I’ve been a virtual-student of Steve Blank (free course) and the Lean Startup Movement of Eric Ries (Eric’s Website). And much of what I present here is a blend of Todd’s Model, Lean Startup principles, and my own (often painful) lessons learned. Because you are likely in one of the early phases, we’ll pay particular attention to the first three phases:
(1) Dream Up, (2) Startup,
(3) Ramp Up, (4) Systems Up, &
Applied 80-20 Rule
Focus 80% of your time and effort on your current stage, and 20% on your next phase.
(1) Dream Up
(typically four months to a year are spent in the Dream Up phase)
Every entrepreneur lives through the Dream Up phase: it’s the business idea that hits you in the shower or just before bed, or in the middle of a television show, or Thanksgiving dinner, or during a conversation with your relative or friends. It’s the “why can’t I find a tool that does this” thought that seers into your brain when you encounter a problem.
Sudden passion hits your mind like thunder and you, with or without your cohort, stay up almost all night -- or for several days -- looking for information about the product or service, and especially about the attributes that make your product or service unique.
If this sounds like you now, even if you don’t even know where to begin, you’re in the Dream Up phase.
Although every business starts in the Dream Up phase, far too few businesses actual do the simple work that this stage of business growth demands . . . far too many entrepreneurs make the costly and fatal mistake of directing their time and money to “other phase” business activities -- rushing to incorporate, ordering materials or inventory, paying to register trademarks or even renting commercial or retail space and pay thousands of dollars (gasp!) -- before discovering if there is even a market to be served!
Another mistake common to the Dream Up phase is fundraising. Other than you, and a few rare friends and family, funds just don’t exist for Dream Ups (with a few exceptions, see my blog on Seed Funding). The risks are just too high, regardless of how strong ‘the idea’ is. Spending time fundraising in the Dream Up phase -- especially early in the Dream Up phase -- is almost always a waste of time.
So, what is important in the Dream Up phase?
Dreaming Up is about discovery, especially of bad options which you can quickly eliminate. You’ll discover new skill as you focus on personal growth as an entrepreneur, and you’ll discover what customers want as you research about similar products and your market. In other words, don’t open that 2000-square foot lemonade bar before having a recipe for lemonade, and who you’re selling it to.
For personal growth, you’ll begin building entrepreneurial skills -- especially creativity and time management. In your business, create hypotheses around (a) your expected product(s), and (b) the expected consumer.
Before going into more detail, take a minute to explore the Premise-Test-Iterate cycle. You’ll use this cycle in every phase to reduce risks by creating hypotheses, testing them, and quickly gathering data (and let’s face it, at this stage, ‘hypothesis’ just a fancy word for “guess”).
You simply must use the Premise-Test-Iterate cycle. It turbo-charges your business. Using this cycle minimizes wondering around directionless, confused about what is and isn’t working in your business. It makes the unknowns, known.
What to Do, and NOT to Do, In the Dream Up Phase
First, DO NOT spend resources on incorporating, creating bank accounts, formal corporate documents (with two important exceptions, below!), or trademark registrations.
DO focus on identifying, as best you can with minimal testing, your ideal consumers (aka “avatars” in marketing), and your minimal initial product or minimal initial business (aka minimally viable product/business). Idealize your customer by predicting your customer’s pains, desires, and needs independent of your product. Predict your product by identifying the pains your product eliminates, the benefits it provides, and the tangible things it does (to be even more sophisticated, also predict side-effects).
The combination of your customer and your product defines your “value proposition,” and one popular model for this is the Value Proposition Canvass, inspired by Steve Blank.
· If budgeting allows (and depending on your product), also DO (a) invention searching and (b) if the search results look promising, file a provisional patent application.
· Begin book-keeping with an App such as MINT.
· Network with persons who you want to involve in the next phase of your business: the Startup Phase.
· DO use Contractor Agreements (CAs), and maybe Non-Disclosure Agreements (NDAs)
Typically, Dream Ups either use too many legal agreements (which scare away needed allies), or they fail to use legal agreements at all, which leaves huge holes in their intellectual property (especially trade secrets and copyrights).
Contractor Agreements: CAs are essential if someone is creating stuff for you (for pay or as a volunteer), whether in writing, graphics, web design, prototypes (especially prototypes), or . . . well, anything. Here’s a form Contractor Agreement (run it by your attorney before using it). <<link>>
NDAs: almost nothing you know, yet, is not publicly known, so NDAs have very little value. However, if you genuinely believe you have a unique idea (including an invention), then an NDA may be wise -- especially as the business approaches a Startup Phase.
How to Cycle
(1) identify essential premises for key business activities appropriate for the business phase
(2) isolate each premises into one or more testable components (if it can be consistently varied, it’s testable)
(3) identify premise-based dependencies in future business development
(4) prioritize the premises as functions of importance, ease/speed, and long-term impact
Design and Implement Tests in Priority Order
(1) design tests for up to three of the highest priority Premises
(2) identify tests as necessarily dependent (serial) or independent
(3) where possible, use existing test data and/or and virtualize the tests
(4) implement the remaining tests, while carefully recording the data
(5) evaluate the data and record conclusions.
Make changes to your business based on the outcome of the test’s data.
Narrow, Simple Example:
Suppose you want to write a book on herbal remedies for arthritis. You want to first discover if there’s even a market for your book before writing it.
Your hypothesis: there is a market for books about herbal remedies for arthritis.
Your tests: you could go to Half Price Books, or Amazon and search for similar books, but you could also put up a marketing page for your unwritten book as if it were finished, drive traffic, and take pre-orders. Searching online is easier and faster than running test sales, so you decide to do that first.
You decide that if there are two or three books about your topic, it will indicate that there is indeed a market. However, if there are no books on the topic, there may not be a market. Alternatively, if there are dozens of books on herbal remedies for arthritis, then the market may be so saturated that it will be difficult for you to make headway in it. (This is a common rule of thumb in the publishing industry).
A quick online search reveals hundreds of books about herbal remedies for arthritis . . . maybe it’s time to move on to the next great idea?
The Key Takeaways from the Dream Up phase are to focus on:
(1) cost-effective research,
(2) the development of multiple testable hypotheses about your product, and your customer; and
(3) NDAs, Contractor Agreements, and maybe Provisional Patent Application(s).
The Startup phase is where business gets real, and social communities created around startups can make this phase a lot of fun. You have at least one value proposition to test, plans to test the proposition(s), and have collected research about your product, your customers, and are actively developing as an entrepreneur. Whether part-time or full-time, you’re “in it” and you’re probably self-identifying to others that you do this business.
The Startup phase is about discovering ‘best choices’ and options, and putting the pieces in place to ‘ramp up’ profitably. It’s about, amid controlled chaos, building the organization and infrastructure to actually start making consistent revenue and profit.
Like the Dream Up phase, too many entrepreneurs fail to respect the activities that must be done prior to ramping up their business, and, as a result many entrepreneurs spend thousands of dollars and years of time trying to produce and sell either the wrong product, advertising and marketing to the wrong customer, or all of these (which is the fast-track to bankruptcy).
Until you have a proven value proposition and a scalable business model hypothesis built around that value proposition, you’re in the Startup phase. Until you know how to bring on employees and/or engage contractors, you’re in the Startup phase. Until you have secured the business formations and intellectual property you need, you’re in a Startup. And, until you have made sales to actual customers that generate revenue (preferably at a profit), you’re in the Startup phase.
Sometimes the Startup phase can be skipped (for example, with a franchise).
DOs for the Startup Phase
· join a community of startup entrepreneurs
· listen to podcasts, take classes, and read constantly about startup activity (such as Eben Pagan’s Startup Club)
· network and make public pitches about your startup
· test value proposition(s) with the Premise-Test-Validate cycle
· explore business models
· consider joining an accelerator or co-working space
· learn the pros/cons of outside investment
· learn how sales are made in your market (ask salespersons!)
· learn about legal issues: incorporating, contractual issues, intellectual property, and investment terms, and identify attorneys who can help
· hire a bookkeeper and locate/meet with a CPA
· engage the resources of your local SBA and, if available, a SCORE counselor with experience in your business area
· inquire with the SBA as well as your local government regarding regulatory and licensing issues that you must comply with to do business legally
Creative entrepreneurs often try to create new business models on top of their new products or new marketing efforts. This is almost always a mistake. There are about thirty recognized business models -- and there are usually three or four that are going to be the most common in your industry. If you are perceived to be creating an entirely new business model, investors will look at this as geometrically increasing the risks you are exposing your business to. Smart founders select a business model from the common choices, and innovate and test from there. Learn more about business models.
Startup funding is almost always in the form of ‘angel investing.’ And, although more will be expected during “due diligence” (when lawyers and accountants for the angels make sure that the startup is telling the truth), gaining the serious attention of angel investors rarely requires more documents than a “pitch deck” and executive summary-style business plan. Angel investors are often successful entrepreneurs who view their investment as both an investment, as well as a mentoring opportunity. Angel funding may be as little as $25,000, or as much as $2-million dollars (large-dollar angels are sometimes called ‘super angels’).
Key Takeaways for Startups are to focus on:
(1) cost-effective testing and data collection;
(2) building a network of internal technicians and external service providers;
(3) getting basic agreements, protections, and legalities in place; and
(4) making actual sales and getting real customer feedback.
(3) Ramp Up
When you’re a ramp-up, frankly, you know it. Just about the only limit on your growth is lacking the funds to advertise and expand. For the rest of us (with the exception of extremely rare software companies), to identify businesses that are ready to ramp up look for businesses with value propositions and business models that are proven with profitable sales.
Every ramp-up was once a startup, and if the founders did their job in the startup phase, then raising money should be, relatively, a synch. However, inexperienced entrepreneurs sometimes find that what looked like their arrival to the big show has turned into an embarrassing and tragic fall as it becomes quickly apparent that their business is based on a value-proposition that can be copied and reproduced without the bundle of **chough** mistakes that plague the business in question.
One business I worked with a few years ago called (for the first time) at the point of funding -- eight figure funding. The owner, a university professor, paid university students to build a software that was gaining interest in a special, growing market, but . . .
. . . representations were made to the investors, including that they had patent applications, copyrights, audited books, and where needed, legal documents in place. Unfortunately, from the start they tried to be their own lawyers and accountants and in reality had almost none of that. Within just a few days, that large investment turned into a small buyout (the software, as a functioning product, was salvageable).
Learn from their expensive and painful lesson:
IF a Ramp Up stage business respects and executes the Dream Up and Startup phases well, then the pieces are in place for much easier funding.
Moreover, the personal network and ‘institutionalized intelligence’ learned from the processes of executing the Predict-Test-Iterate cycle dozens (or hundreds) of times simply cannot be duplicated -- meaning that the Founders cannot be duplicated.
Ramp Up Funding often comes from Venture Capitalists (ah! there they are!), or Private Equity funds, and requires deep due diligence and business planning, intellectual property reports, and well-kept documents and accounting books to achieve.
Key Takeaway for the Ramp Up Phase: if you want to preserve your equity interest over the long-haul, Dreaming Up right and Starting Up right are essential.
(4) Systems Up
(Systems In/Spread Out)
The Systems phase is all about growing a business into the truest sense of the word “entity” -- a thing that can survive on its own, independent of a specific employee, or the activity of a specific founder (although in my view, founders or visionary-CEOs are absolutely essential).
Depending on the type of business, developing internal systems (“Systems In”) enables easy geographic or market expansion (“Spread Out”). The classic example of this are Franchises, such as McDonald’s. As a consumer, you can step into any of the 5000 McDonalds’ from Rome, Italy to Rome, Georgia, and be served food with a predictable taste, at a predictable price, in a predictable way.
That’s a classic franchise system, and it’s ability to easily duplicate means that entrepreneurs that pay for a franchise are skipping the time and expense required to go through Dream Up, Startup and Ramp Up phases (which is why franchisees pay franchise fees).
Fortunately, there are businesses that specialize in creating business systems, such as the Dwyer Group.
Funding to pay for system development and growth is most commonly raised on the public exchanges, bond markets or with “private equity.” Funding at this stage requires the assistance of experienced financial professionals, who will expect a significant portion of the ‘raise’ as a commission (and, it’s well worth paying it).
Key Takeaway for the Systems Phase: building systems and expanding through systems is not for any individual to “do.” Rather, if you as a founder are fortunate enough to maintain some control or influence in your company this long, focus on creating culture and values within your organization . . . in other words, learn leadership.
Market leaders have a host of issues to face related to, primarily staying on top. Interestingly, the most successful market leaders encourage their employees to focus on the personal development activities of Dream Ups: creativity and time management. Leader businesses focus on acquisition, new markets, and new products to promote into existing channels.
Sadly, too many companies choose to secure leadership positions through anti-innovative and anti-consumer legislation and lobbying. Microsoft, Google and Apple have all lobbied hard to kill software startup patent protection, and to channel government funds intended for startups to their own projects (by drying up such funding, they are preventing potential competitors from entering their market).
Leaders typically have easy access to capital, and while they do (and should) sell and innovate, their primary focus is cultural: ethical issues, integrity as well as personal and professional excellence dominate management thinking. One way to exercise all of these muscles is to actively support early phase businesses by promoting education, encouraging employees to volunteer with startup assistance, and by making resources -- even funding -- available. Recently, particularly Microsoft through it’s Bizspark program, and Google through Google Ventures have made significant strides into these types of activities.
Key Takeaway: if you’re a market leader, don’t be evil.
What To do Next:
· So, now that you’ve been introduced with the Five Stages of Business Growth:
· identify your business’s stage
· write down one key stage-appropriate activity that you need to do that you are not currently doing
· write down as many stage-Inappropriate activities that you are doing
· make a plan to delegate or eliminate all lower stage activities, and eliminate as many non-stage essential activities as you can, while preserving a maximum of 20% of your efforts for future stages
· identify ‘next stage’ activities, and quickly jot down whether you plan to do each yourself, or whether you plan to delegate that activity